ECON 184. The Aid Debate. The Aid Debate February 25,

Transcription

1 ECON 184 The Aid Debate The Aid Debate February 25,

2 Contents 1 Definitions and background Type of aid (by source) Official Development Assistance (ODA) Alternative classifications Main actors and players 7 3 Trends 15 4 Aid and economic growth 26 The Aid Debate February 25,

3 1 Definitions and background The Aid Debate February 25,

4 1.1 Type of aid (by source) Private Non-governmental organizations (NGOs) Churches Individuals Companies Foundations Official (ODA) Bilateral; country-to-country Multilateral: UN, World Bank, IMF, etc... The Aid Debate February 25,

5 1.2 Official Development Assistance (ODA) ODA includes all official aid.... minus military aid and loan repayments The Aid Debate February 25,

6 1.3 Alternative classifications By type of flow Goods Cash grants Concessional finance. By recipient Governments Individuals Institutions By aim Development and growth Political evolution Emergency relief or stabilization after economic shocks The Aid Debate February 25,

7 2 Main actors and players Bilateral USAID DFID The Aid Debate February 25,

8 The Aid Debate February 25,

9 The Aid Debate February 25,

10 Multilaterals World Bank Group International Monetary Fund African Development Bank The Aid Debate February 25,

11 UN Agencies The Aid Debate February 25,

12 The Aid Debate February 25,

13 Aid target Source: Moss (2007) The Aid Debate February 25,

14 Millennium Development Goals Source: Moss (2007) The Aid Debate February 25,

15 3 Trends The Aid Debate February 25,

16 Trends in total aid Billion US$ % of GNI Percent of donor GNI (right-hand scale) Real value (constant 2004 US$) (left-hand scale) Nominal value (current US$) (left-hand scale) Figure 1. Global ODA Source: OECD/DAC database Source: Radelet (2006) The Aid Debate February 25,

17 Aid in Africa Total flows of aid to Africa (constant 2006 dollars) 40,000,000,000 35,000,000,000 30,000,000,000 25,000,000,000 20,000,000,000 15,000,000,000 10,000,000,000 5,000,000, Source: Easterly (2008). The Aid Debate February 25,

18 Africa vs rest of the world Aid to Gross National Income in Africa and Other Developing Countries Aid to Gross National Income (%) Africa Non-Africa The Aid Debate February 25,

19 Africa vs rest of the world Source: Moss (2007). The Aid Debate February 25,

20 Recipients of aid (Radelet, 2006) The Aid Debate February 25,

21 Table 1. Major Aid Recipients, 2004 Total ODA (millions US$) 1. Iraq 4, Afghanistan 2, Viet Nam 1, Ethiopia 1, Congo, Dem. Rep. 1, Tanzania 1, China 1, Egypt 1, Pakistan 1, Bangladesh 1,404 The Aid Debate February 25,

22 10. Bangladesh 1,404 Aid as % of recipient GNI 1. Sao Tome & Principe Guinea-Bissau Micronesia Eritrea Timor-Leste Marshall Islands Burundi Afghanistan Sierra Leone Malawi 31 The Aid Debate February 25,

23 Aid per capita (US$) 1. Nauru Mayotte Palau Marshall Islands Tuvalu Micronesia, Fed. States Cook Islands Dominica Palestinian Adm. Areas Cape Verde 298 Source: OECD 2005 Development Cooperation Report The Aid Debate February 25,

24 Table 2. Official aid receipts by region, 2004 Billions of US$ Percent of GNI $ per person Sub-Saharan Africa South Asia East Asia & Pacific Europe & Central Asia Middle East & North Africa Latin America & Caribbean Low income Lower middle income Upper middle income Source: World Development Indicators online The Aid Debate February 25,

25 Top African recipients Source: Moss (2007) The Aid Debate February 25,

26 Bottom African recipients Source: Moss (2007) The Aid Debate February 25,

27 4 Aid and economic growth The Aid Debate February 25,

28 The Solow model again Framework to justify aid. Let s go back to the Solow model The Aid Debate February 25,

29 d+n sf(k)/k k* k In this model there is a unique equilibrium The Aid Debate February 25,

30 Multiple equilibria Several factors can create multiple equilibria in this model. 1. Variable saving rate Suppose that s = s(y, r) s is the saving rate, y is income and r is the interest rate (MPK) Thus, s = s(k) and it s not longer a constant. This leads to a new curve The Aid Debate February 25,

31 n+d s(k)f(k)/k k* k*** k** capital Economies are identical except for their initial conditions. There is no global equilibrium. There are two local ones. The Aid Debate February 25,

32 2. Non-convexities Assume that s is fixed, just like in the original Solow model. Non-convexities arise when the APK is nonlinear due to technical reasons. Or when there are two technologies available.... but firms can only use one at a time. In both cases the s f(k) k will follow the pattern shown above. The Aid Debate February 25,

33 Poverty traps? Table 1: International Disparities in GDP per Worker Country Population(m, 2000) R1960 R2000 USA United Kingdom Argentina France Italy South Africa Mexico Spain Iran Colombia Japan Brazil Turkey Philippines Egypt Korea, Republic of Bangladesh Nigeria Indonesia Thailand Pakistan India China Ethiopia Mean Median Notes: - R is GDP per worker as a fraction of that in the USA. The Aid Debate February 25,

34 Figure 2: Output Per Worker: 1960 versus 2000 Relative GDP per worker Log GDP per worker relative to USA, 2000 USA HKG SGP AUT ITA BEL NOR FIN FRA DNK NLD TWN ESP ISR GBR SWE AUS CAN KOR CYP JPN PRT GRC MUS MYS TTO CHL BWA MEX ARG ZAF URY BRA IRN GAB VEN SYR TUR DOMPAN JOR NAM FJI EGY THA GTM SLV CRI MAR ECU COL GUY PRY PER ROM IDN PHL LKA PAK CHN IND BGD PNGGIN HND JAM BOL ZWE NIC CIV CMR COG LSO NPL SEN GMB KEN BEN GHA MRT TCD ZMB MWI UGA BFA TGO MOZ AGO MDG MLI RWA NER CAF GNB ETH NGA TZA BDI ZAR Log GDP per worker relative to USA, 1960 Source: Durlauf et. al (2005) The Aid Debate February 25,

35 In his calculation, Quah uses per capita GDP relative to the world average over the period 1962 to 1984 in a sample of 118 countries. Relative income is discretized into state space S := {1, 2, 3, 4, 5} consisting of 5 bins, with states corresponding to values for relative GDP of , , 0.5 1, 1 2 and 2 respectively. The transition matrix P = (p ij ) is computed by setting p ij equal to the fraction of times that a country, finding itself in state i, makes the transition to state j the next year. The data is assumed to be stationary, so that all of the transitions can be pooled when calculating transition probabilities. The result of this calculation [Quah (1993, p. 431)] is P = Azariadis & Stachurski (2005) Handbook of Economic Growth, Chapter 5: Poverty Traps The Aid Debate February 25,

36 The Aid Debate February 25,

37 334 C. Azariadis and J. Stachurski The Aid Debate February 25,

38 Correlates The Aid Debate February 25,

39 Aid and growth Figure 2. Foreign aid and growth, GDP per capita growth, % ODA % of GDP Source: Radelet (2007) The Aid Debate February 25,

40 Aid and growth Source: Moss (2007) The Aid Debate February 25,

41 Burnside and Dollar, 2002 Is the effect of aid on growth conditional of economic policies? Do donor governments and agencies allocate more aid to countries with good policies? These two are important question and BD (2002) try to answer them both. The Aid Debate February 25,

42 Empirical strategy To answer the first question, the authors will estimate the following equation g it = α + βaid it + θpolicy it + γx it + η t + ϵ it (1) g it is the percapita growth rate of country i in period t. AID is AID GDP Policy and index of good policies (budget surplus, inflation and openness). X it are controlled variables. g it = α+βaid it +θpolicy it +γ(aid it Policy it )+γx it +η t +ϵ it (2) Question: can we obtained unbiased parameters for β? What about γ? The Aid Debate February 25,

43 Data sources New data from the World Bank on aid. Sample of 56 countries and six four-year time periods from to There are 21 African countries. All major aid recipients in other regions are included. They also concentrate on lower income countries: those with GDP percapita lower than $1,900 in The sample is then reduced to 40 countries. The Aid Debate February 25,

44 Empirical strategy The authors recognize the endogeneity of aid. Two questions for you: How can aid be endogenous? How could you solve this problem? The Aid Debate February 25,

45 Empirical strategy (II) The authors will use instrumental variables. The key idea is that AID is endogenous. They also created an index for good policies. Policy = Budget surplus 1.40 Inflation+2.16 Openness. However, they will treat the policy index as exogenous. Do you agree? The Aid Debate February 25,

46 Variables The Aid Debate February 25,

47 Results The Aid Debate February 25,

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49 The Aid Debate February 25,

50 What explains aid? Now the focus is on the variables that correlate with aid. The new equation is AID it = α 2 + λpolicy it + πx it + ψ t + u it (3) The Aid Debate February 25,

51 Correlates of aid The Aid Debate February 25,

52 Big impacts on policy The Aid Debate February 25,

53 New evidence Easterly, Levine and Roodman (2004) collected more data. BD data ended in 1993 while ELR expanded it to 1997 The Aid Debate February 25,

54 The Aid Debate February 25,

55 Partial association (BD) The Aid Debate February 25,

56 The Aid Debate February 25,

57 Sources Radelet, S. (2006) A Primer on Foreign Aid CGD Working Paper 92. Easterly, W. (2008) Can the West Save Africa? NBER Working Paper Burnside and Dollar (2000) Aid, Policies, and Growth, American Economic Review, 90(4): , September. Easterly, W.; R. Levine and D. Roodman (2004) Aid, Policies, and Growth: Comment American Economic Review, 94(3): The Aid Debate February 25,